With stock market volatility kicking into high gear for the new year (at least so far), investors may be wondering if it’s time to rotate out of the biggest winners (like tech plays) and into the neglected value plays.
Indeed, many of the less-loved value plays sport juicy dividend yields. And while expectations of lower interest rates (and hopes for more cuts than expected) have pretty much worked their way into today’s slate of stock valuations, I still view many yields as a tad on the higher side.
My bet is they won’t stay historically swollen for very long.
Why?
The days of 5% Guaranteed Investment Certificates (GICs) and nearly 2% interest on savings probably won’t last forever. In fact, I believe that by this time next year, you’d be hard-pressed to find a GIC with a rate north of the 4% mark for a term of over 12 months.
In this piece, we’ll focus on one of my favourite Canadian utility firms in Fortis (TSX: FTS). It’s a magnificent dividend stock that likely won’t make headlines throughout the year.
Source: Getty Images
Time to rotate into defensive dividend stocks like FTS stock?
As the rates on risk-free assets begin to retreat, investors should expect some downward pressure on the “risky” yields offered by various dividend-paying stocks. How will yields contract in such dividend plays? It will be via capital appreciation over the next several quarters.
Now, that’s not to say it’ll be an easy, smooth ride higher for your average high-yield utility (like Fortis stock) or banking stock. The terrain remains rough. But it’s a terrain worth hiking on going into 2024’s end. Indeed, sometimes, it’s the hard path that can be most lucrative!
Reason #1: Fortis’s cash flows are highly predictable
In other words, it’s a boring play due to its high degree of cash flow predictability. Further, it’s growing at a pretty decent mid-single-digit rate that’s less tied to how Canada’s economy will fare through this year or through the end of the decade.
This lower sensitivity to economic growth makes Fortis such a fantastic defensive value stock to hold through turbulent market waters. And though the stock has had a bit of a run since bottoming out in the back half of September 2023 (shares up almost 9% since then), I still view the stock as undervalued and the dividend yield as rich, at least historically speaking.
Reason #2: Fortis stock looks cheap right now
At writing, shares trade at 17.8 times trailing price to earnings (P/E) to go with a 4.31% dividend yield. Not a massive yield by any stretch of the imagination. That said, it’s a rock-solid one that’s unlikely to be rattled by even a hard landing for the Canadian or U.S. economies.
At just north of $55 per share, FTS stock ought to be considered a top high-yield value candidate this quarter.
Reason #3: Generous and projectable dividend growth
Additionally, the dividend is slated to grow every year at a fairly decent pace. So, while your workplace may skimp on your raises amid inflation, don’t count on Fortis to miss an annual dividend hike, as it continues to spoil long-term investors seeking the perfect balance of passive income and stability. What more could you ask for as an investor looking to sail through a choppier year?
